Processes Before People

The risk of over hiring at Seed stage

So, you've finally raised your seed round? Congratulations! After months of back-and-forth due diligence with investors, you have herded the proverbial VC cats into signing term sheets and transaction documents. Those halcyon days of raising in a matter of weeks from friends and family, angels and pre-seed investors feel like a distant memory. The process has undoubtedly helped you refine your business model and strategy, although it frustratingly distracted you from actually doing what you enjoy most: solving your customers' problems. But the money is now in the bank, and you can get on with all those grand plans you've been formulating.

As the dust settles and you're done congratulating the team on all their hard work, you realise that you made a lot of promises to your new investors about what you would do with their money. At the time, you thought, perhaps, that some of these were a little over-ambitious but expedient to convince wavering VCs that you could deliver the returns they are looking for. Undoubtedly, though, you promised them that you would grow significantly, at least 100% year over year, maybe with a couple of new features to launch and markets to enter along the way.

Until now, you have never really had any money to spend, so you've been scrappy and hacked your way to build product and acquire customers. It hasn't been systematic, and there are probably a bunch of bugs in the tech stack that you've been firefighting until you have the resources to do something about. If you were to look at the revenue you have generated per full-time employee and dollar invested, it would be impressive, and you have almost certainly been punching well above your means.

Now there's money in the bank, you don't have to be so lean, right? Those bugs can be solved by hiring more developers, a nice mix of junior, middle and senior if you can find them. Those growth targets aren't going to hit themselves, so you better hire plenty of sales and marketing people, and you can finally hire those dedicated customer success and support teams that will increase conversion and retention. When salaries are so low in emerging markets and complex technology alternatives relatively expensive, it seems only logical to hire more people – who needs HubSpot anyway?!

Suddenly, that team of less than 10 sitting on top of each other in a small office has tripled or quadrupled in size, as has your burn rate. This is all fine, you tell yourself, an upfront investment that will pay dividends in higher customer acquisition and revenue growth in no time. There's 18 months runway in the bank, your investors are happy to see you spending their cash to deliver what you promised, and you reckon there is time to figure things out.

But then things don't quite go to plan. Maybe there were more bugs than you realised in the product, and it will take six months to iron them out, slowing your ability to acquire new customers. Or maybe that "ideal customer profile" you thought you had identified is not such a big fan of your product, meaning you have to pivot to a new segment and relearn how to sell to them. Or maybe it's something totally beyond your control, which in emerging markets could range from a global pandemic or your country being invaded to your prime minister being shot or unnaturally cold weather combined with a gas shortage (all real-world examples Sturgeon Capital’s portfolio companies have dealt with), any of which can set you back several months or longer.

These challenges, internal or external, are all part of building a startup, and you knew you were signing up to that at the beginning - didn't you?! It's just now there is a much larger team relying on you to get through this and to keep paying their salaries along the way. Unfortunately, like London buses, these challenges tend to come in bunches. While that runway had looked healthy and those growth targets achievable six months ago, the bank balance is now shrinking rapidly, and those targets are a distant mirage.

When push comes to shove, you aren't going to let the company you have worked so hard to build go under just like that. You are faced with the difficult decision of having to lay off some of those brilliant employees you've so assiduously trained up and imbued with the messianic vision of your company. This hurts, both for you and them. It takes the momentum out of the company, and those remaining employees may begin to question the dream you have sold them.

You might get through this. You might reduce the team size and burn, get personally stuck into the trenches and iterate your way to a solution that works. Hopefully that's what happens. But in many cases it won't. You will struggle to raise new funding with momentum lost and a limited runway to get it back. Perhaps you can convince your existing investors to back you through sheer force of personality and conviction that the opportunity is there for the taking. But that is a hard sell.

This cautionary tale is not designed to put you off raising money or suggest hiring is a bad idea. Clearly, hiring is absolutely necessary to scale your business and getting it right is one of your most important roles as a founder. The point is that if you are truly going to scale then you won't be able to do so just by throwing more people at the problem. It is a short term fix, especially appealing in emerging markets where the cost of labour is so low, that in the long-term will leave your business cumbersome and unable to adapt to new challenges or capture new opportunities.

Rather than hiring as a first resort, you should focus instead on building the systems and processes that will enable your team, existing and new, to operate more efficiently and effectively. These will scale and are easier to build when the team is small and agile than when it has ballooned and established biases and habits. These systems and processes are one of the core things to do after raising your Seed round in order to be able to raise a Series A. You probably haven’t done this before, but your investors, fellow cofounders, mentors or advisors should be able to help you with this.

So, as that dust settles and you smile at your bank balance with more zeros (good ones!) than you have ever seen, take a moment before you hit the big red hiring button. What made you successful till now was your ability to do more with less, and that shouldn't change just because you have money in the bank. As a seed-stage company, you do not have a scalable growth engine into which you can pour the fuel of VC capital. That is what you need to figure out now so that you can raise a Series A and realise the full potential of your startup.

P.S. One final point. When raising your seed round, look for investors with the patience and perspective to see you through the peaks and troughs of company building. The best way to know beforehand is to speak to their existing portfolio companies. One or all of them will have had an existential crisis (or three) since that investor came on board, so they can give real-world examples of how they reacted to bad news. Us VCs are not as smart or as all-knowing as we (or you) sometimes think we are, and it is in those times of crisis we show whether we really add value or not.